It’s getting hot out there, particularly in the housing market.
With bidding wars increasingly common in many locations, buying a home requires discipline and strategy—and knowledge of mistakes that cause homebuyers to miss out on homes.
To lower your chances of homebuying heartbreak, here are five common mistakes to avoid:
- Going over your budget
A critical part of homebuying is establishing what you can comfortably afford, and the maximum loan value you can qualify for. You can do this by contacting me.
Banks and lenders determine the maximum payment you can qualify for using your debt-to-income ratio (DTI): the percentage achieved by dividing your monthly liabilities (such as student / auto loans and credit cards) by your gross monthly income.
For example, if your pay stubs or tax returns show you making $72,000 per year, this means you make $6,000 per month. If you have $2,300 per month of liabilities, your DTI without a house payment ($2,300 / $6,000) is 38%.
Most banks and lenders allow borrowers to have a maximum DTI of 43%, so the maximum mortgage payment for a borrower who makes $6,000 per month and has a current DTI of 38% could afford (including taxes and insurance) is around $2,580 per month. You’ll need to determine what amount fits within your budget.
- Submitting a low offer in a hot property market
While it’s a tempting strategy to submit a low initial property offer and expect to negotiate, be careful doing this in hot property market—particularly if you believe a home is already priced well.
In hot property markets, homes often receive multiple offers, and a low offer can frustrate a seller—preventing you from any negotiations. If you feel like a home is priced well in a hot property market, consider offering the full price.
- Not knowing your options when a property appraisal is less than your offer
An unfortunate and common situation for homebuyers (particularly in hot housing markets) is making an offer on a home, having the offer accepted by the seller, but the appraisal comes back as lower the agreed-upon selling price. Because mortgage lenders will only lend funds up to a percentage of the appraisal price, a buyer could potentially miss out on receiving enough funds to purchase the home at the agreed upon price.
In this situation, it’s important to remain calm and consider your options. These include looking over the appraisal contingency clause which can allow you to renegotiate the agreed upon price. You can also ask the appraiser for a value appeal, which them to reevaluate a property or explain why the value was lower than your offering price. Third, you can try to work with your mortgage lender to get a second appraisal, which can sometimes come back higher than the original appraisal.
If all else fails, you could try to come up with the extra funds to pay for the home. In this case, you would be purchasing a home for more than it’s worth, which financial advisors don’t recommend.
- Making large purchases with credit cards
Within several months of applying for a mortgage (and especially after you’ve made an offer on a home), avoid opening any new credit accounts or making large credit purchases with credit cards. This can lower your credit score, cause you to receive a higher mortgage interest rate, and can sometimes eliminate your ability to qualify for a mortgage.
- Not budgeting for closing costs
Your down payment and Realtor fees are only part of buying a home—you’ll also have to pay for closing costs. Closing costs can vary substantially, but typically are 2% to 7% of a home’s purchase price.Your mortgage lender can estimate your closing costs before you make a property offer. By asking for a closing cost estimate in advance, you can determine if a home is still in your price range.
Knowledge increases your homebuying power
In the current housing market, and even in slowdowns, there are good strategies to follow when buying a home—and things to avoid.
By avoiding the mistakes described in this blog post (and remaining aware of them), you’ll increase your likelihood of buying the home you want. If you have questions on this subject, or are interested in a mortgage, contact me today!